View from NEW YORK America's aircraft giants slow to stalling speed

Confidence is at a low altitude for Boeing and McDonnell Douglas. David Usborne looks at the industry's problems

Test flights for the new Boeing 777 wide-body jet were brought to a halt earlier this month after one of the prototype planes unexpectedly depressurised at high altitude and was forced to dive steeply, giving two members of the crew a case of the bends.

The trouble was traced to a faulty air valve. The problem was corrected and the test programme resumed in the middle of last week. Boeing as a whole, though, appears stuck in its own dramatic downward glide.

At the start of this month it announced plans to lay off another 7,000 of its workforce, on top of the 25,000 it has already shed in the last three years. Production rates are also to be scaled back.

Even more vivid was the news last week from Boeing's main North American rival, McDonnell Douglas, that it may be obliged to suspend production of its 300-seat MD-11 jet for a part of next year unless orders pick up quickly. This would be a heavy blow to the McDonnell Douglas workforce at the Long Beach plant where the MD-11 is assembled.

The plane makers continue to be hit by the troubles of the airlines, upon which they naturally depend for orders. But even as recently as last December, Boeing's chairman, Frank Shrontz, was telling his workforce that the worst was probably over. "We hope we're bumping along the bottom," he suggested. "It's clearly been a challenge and a difficult market environment."

But the bottom, it seemed, had not been reached. Since the new year, cancellations and deferments of orders have been presented to Boeing by several important carriers. USAir, part-owned by British Airways, deferred the purchase of eight 757 aircraft that had been down for delivery in 1996. Continental asked for delivery delays that alone will reduce the flow into Boeing's coffers by $4bn. Air France also put back its delivery dates.

Even so the scale of the latest cuts at Boeing has taken most analysts by surprise. As well as implementing the additional lay-offs - 9,305 jobs at Boeing were eliminated during 1994 - the company announced that production of the 737, the workhorse of many airlines, would be trimmed from 8.5 to 7 per month.

The worsening outlook was acknowledged by Mr Shrontz when the latest cuts were announced. "The job reductions are higher than we anticipated just a few weeks ago," he said. "Since the beginning of the year, several customers came to us asking to postpone deliveries because of the continued softness of the airline industry."

Much more drastic, however, is the prospect of McDonnell Douglas having to mothball production of the MD-11, its premier product that competes in the wide-body market with the Boeing 747 and the A330 and A340 models of Airbus. Company officials insist that suspending production remains a last resort action, but one that nonetheless may not be avoidable.

The outlook for the MD-11 does not look good. Deliveries have dropped 60 per cent in two years, from 42 aircraft in 1992 to only 17 last year. As the order book looks now, the company may not do any better than to sell 10 next year.

The company has been let down especially over a promise of large orders from Saudia, the Saudi Arabian carrier. Last year, President Bill Clinton announced that orders worth $6bn had been pledged to US companies by the Saudis, to be split between Boeing and McDonnell Douglas. It was thought the deal would include 11 of the MD-11s.

The entire package now seems to be in doubt, however, with Saudia facing financing problems.

Robust competition from the two Airbus models meanwhile adds to the problems at McDonnel Douglas. While the American manufacturers continue to scale back, Airbus chairman Jean Pierson reported recently that he expected overall sales by the European con- sortium to hold steady this year, with deliveries expected to reach 123 aircraft, the same as in 1994.

The long-delayed upturn in orders may yet come, however. Looking ahead to what they hope will be better times, Boeing officials point to the overall growth in air traffic of 5 per cent last year, with a strong surge in Asia and especially in China.

And for the first time in several years, some of the main airlines have returned to the black.

According to one Wall Street analyst, Boeing may even have overdone its cuts. "Boeing tends to be too pessimistic at industry troughs and overly optimistic at peaks," he said. "We believe that what is happening is that the weakest airlines, in reviewing their financial outlook for the year, are cutting deliveries, while the stronger airlines have not yet placed new orders. Consequently, the short-term news is really much worse than the underlying industry fundamentals suggest."

If Wall Street is right, the American aircraft industry may yet be about to pull out of its spin. When it does, Mr Shrontz and others may, like the crew of the Boeing 777, get a slight case of the bends - but nothing that a few hefty orders won't quickly cure.